The stock market had an amazing day on July 26th 2022. The tech-heavy Nasdaq Composite surged 4%, its biggest gain in more than two years, and the Dow Jones Industrial Average added more than 450 points.
Market watchers felt this was all because of what the federal reserve did and said this week, the federal reserve increased the interest rates by 0.75 percentage basis point for a second consecutive time to fight inflation, as was expected. However, the Fed Chair said they plan on slowing down the increases. The market saw this as a good sign as it could mean we are near the peak of inflation, and that we are at the peak of interest rates. And if we are at the peak of inflation and interest rates that means things can only get better from here.
Are We In A Recession?
“I do not think the U.S. is currently in a recession and the reason is there are too many areas of the economy that are performing too well,” said Fed Chairman Jerome Powell at a press conference. “This is a very strong labor market … it doesn’t make sense that the economy would be in a recession with this kind of thing happening.” The U.S. economy added 372,000 jobs in June, according to the Jobs Report from the Bureau of Labor Statistics.
At a July 8 Ethnic Media Services briefing, Dr. Rakeen Mabud, chief economist and managing director of policy and research at Groundwork Collaborative, highlighted the need to plan for and have a better understanding of the impacts of economic fluctuations beyond Wall Street, on the lives of ordinary people and communities.
“While the labor market has experienced robust job growth in recent months, we must reject calls to push the economy into a recession and put millions out of work in the name of combating inflation. Doing so would be especially catastrophic for Black workers, who face nearly double the unemployment rate of white workers even in the best of times.”
Investing In Care, Climate & Housing
“Rather than condemning millions to joblessness, we must make the critical, long-overdue investments in care, climate, and housing that will bring down costs and strengthen our economy as a whole,” said Dr. Mabud. The Fed must commit to building a healthy, resilient economy.
On the one hand, gross domestic product, a key measure of economic output, shrank, raising fears of recession. GDP fell 0.9% in the second quarter, the second straight decline and a strong recession signal. On the other hand, the job market remains very strong, telling us the economy is still robust.
The Virus & The Economic Crisis
Some economists call two consecutive quarters of contraction a technical recession, said Chad Stone, Chief Economist at the Center on Budget and Policy Priorities. In the past when the US economy shrank for two consecutive quarters, the US economy was declared to be in a recession. However massive job losses occurred during seven out of the past seven recessions, and that’s not happening now.
There’s no steadfast rule governing what defines a recession in the United States.
However we do see that the pandemic economy is its own thing, said Stone at the briefing.
The present economic crisis is not so much about inflation as it is about the virus and its impact. Pandemic-related supply chain disruption resulted in decline in economic activity. The coronavirus pandemic forced the government to inject money into the economy and Americans received stimulus checks that generated demand. Government measures like the American rescue plan gave juice to the recovery and prevented human suffering.
However, Stone was concerned that the government hasn’t allocated money for safety programs to survive a possible economic downturn. Some states have reduced unemployment to 12 weeks.
Megacorporations Are Using The Virus As An Excuse To Raise Prices
The country is currently seeing the effects of inflation in several areas such as gasoline, food prices and housing. Dr. Mabud said prices are high, not because of inflation caused by rising wages, but because of gouging from what she described as “megacorporations.” According to Mabud, corporations are using the coronavirus pandemic as an excuse to keep prices artificially high and profiteer.
“Mega corporations are taking advantage of inflation to raise prices on consumers. Profit margins are at a record high,” said Dr. Mabud. Corporate profits over the last few decades have strengthened corporate power under the cover of inflation. For instance Visa and Mastercard, a duopoly that control 70 percent of the market, are increasing their fees when they are not impacted by supply chain issues.
The Roosevelt Institute said corporations on an average charge consumers 72 percent more than their input cost compared to 56 percent pre-pandemic, she said. Similarly, Economic Policy Institute reported that nearly 54 percent of recent inflation can be attributed to corporate profits, compared to the 11.4 percent stake that corporate profits had in rising prices between 1979 to 2019.
What is NOT causing price hikes, she says, are worker wages, and investments in our economy. Economic Policy Institute report states that labor costs are dampening—not amplifying—price pressures. Less than eight percent of current inflation can be attributed to rising labor costs.
Can Congress Crackdown On Rising Costs?
We have a threat of recession even when we are in recovery, argues Stone. Inflation is at a 40-year high. Interest rates are rising. And gas prices have hit a frightening $5 a gallon. Even if the recession is a shallow one, demographic groups that get hurt even by a shallow recession need to be watched out for, said Stone.
Though the Household data reflects them in the household employment statistics, the gig workers don’t get counted in the Bureau of Labor Statistics’s Jobs Report, said Alix Gould-Werth, Director of Family Economic Security Policy, Washington Center for Equitable Growth. There is onerous eligibility criteria for the income support system, a system that is inherently weak. Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP), Social Security, Disability Insurance (DI), and Supplemental Security Income (SSI) provide too little money. On average, unemployment benefits replace only 40% of a worker’s wages. Undocumented workers are rarely eligible for these funds.
In order to attack the root source of inflation Dr. Mabud suggested that Congress could crack down on profiteering and institute a windfall tax; invest in more resilient and equitable supply chains; and incentivize corporations to increase productivity by making investments in the firm.
“Policymakers must consider thoughtful solutions to addressing inflation. The government should move forward with necessary care, climate and housing investments to bring down costs and strengthen the economy”, said Dr. Mabud.
“We care about inflation because we care about people and their ability to live a good life.”